Standing Committee D

[Mr. Eric Illsleyin the Chair]

Jonathan Djanogly: On a point of order, Mr. Illsley. A few Government proposals have been tabled this morning, so we are now up to new clause 436. It is worth spending some time talking about that. We should put it on the record that we are delighted that this Bill is being consolidated—the Conservative party argued for that from day one—and we are pleased that the Government have changed their mind and decided to consolidate.

Eric Illsley: Order. That is not a point of order for the Chair.

Jonathan Djanogly: I shall come directly to my point, Mr. Illsley. Although we are happy that these proposals have been tabled, they have been tabled very late, so we will not be able to consider them in Committee. I want to put that on the record and to ask whether you have any views on the matter.

Margaret Hodge: Further to that point of order, Mr. Illsley. I hope that I am in order, and no doubt you will stop me if I am not. I had informal discussions outside the Committee about the tabling of these consolidation amendments with Conservative and Liberal Democrat colleagues. We agreed informally that there is clearly not time to give detailed consideration to these new clauses in Committee and said that we would share them with professionals, particularly the Law Society. We have shared them with all members of the Committee.
I am prepared to meet Opposition Members during the recess if necessary to consider whether any amendments are required, which we would then table on Report. If that does not work, we will clearly not be able to proceed with this further consolidation.

Jonathan Djanogly: Further to that point of order, Mr. Illsley. That is the reality of where we are. It should be put on record that we are in the closing stages of consideration in Committee, following consideration in the House of Lords, and that this is a late stage to table 430 new clauses.

Margaret Hodge: Further to that point of order, Mr. Illsley. These proposals are being added at the express desire of Members of the House of the Lords, particularly Conservative peers, and some Labour peers too. We are trying to meet their views and, most importantly, to ensure that we provide an Act that serves its purpose. If Opposition Members do not wish to co-operate with a procedure that is forced upon us in this way—

Jonathan Djanogly: You forced it upon us.

Margaret Hodge: No. That is not true. The consolidation in the Bill of those proposals from other legislation is at the direct request of Opposition Members in the House of Lords. We are responding to that. Clearly, there needs to be co-operation from all members of the Committee and from all hon. Members if we are to consolidate the Bill. That is why I have offered informal meetings during the summer recess to discuss any issues that Opposition Members may wish to raise and why I have said that if amendments are required we will table them on Report.
If hon. Members do not wish to co-operate in the procedure that is before us as a result of a request from Opposition Members in the House of Lords, we will have no option but to withdraw the 400 new clauses.

Eric Illsley: The hon. Member for Huntingdon (Mr. Djanogly) has made his point, but it is not in the hands of the Chair to respond to it. The timetabling of the Bill is in the hands of the Government, and we are bound by the programme order, which has been agreed to.

Clause 217

Provision of insurance

Jonathan Djanogly: I beg to move amendment No. 460, in clause 217, page 99, line 2, at end add—
‘( ) The cost of any excess under an insurance policy permitted to be purchased under this section may be paid for by a company or associated company, provided that it does not exceed £5,000’.
We are discussing the clauses in chapter 7 of part 10 that deal with provisions protecting directors from liability. Clause 217 permits a company to take out and maintain insurance for a director against any liability referred to in clause 216(2), the scope of which we argued in our previous sitting should be broadened. However, if excess is provided for under an insurance policy, it is logical for a company to be permitted to meet the cost, provided that it does not exceed a reasonable amount, given that the existence of an excess normally reduces the premium payable by a company.
The amendment would enable a company to meet that cost under an insurance policy that it is permitted to take out under clause 217. On a probing basis, we suggest that the provision should encompass an excess sum of less than £5,000.

Mike O'Brien: This is not an unreasonable amendment and we accept that it states a modest face value. It also picks up a recommendation made in the company law review. However, in the light of the major reforms introduced in the Companies (Audit, Investigations and Community Enterprise) Act 2004, we do not feel able to accept it. It is preferable to keep to the basic principles that underline the chapter.
If a director’s liability is to a third party, the company will in most cases be able to indemnify him. However, if the liability is to the company itself, it would be wrong in principle for the company to indemnify the director, even if the amount involved was relatively modest, as I accept the proposed amount is.
The Companies Act 1985 permits companies to indemnify directors against most liabilities to third parties, including shareholders who bring a class action, or to pay a director’s legal costs up front, providing that the director repays any loans, discharges or other liability to the company if he is convicted in criminal proceedings or judgments are made against him in civil proceedings brought by the company or an associated company. It should be clear that companies are already permitted to indemnify directors in a wide range of circumstances.
It is, however, necessary to draw some lines in the sand. Those lines are drawn in the right places in the 2004 Act and in the Bill. The hon. Gentleman’s point is not unreasonable, but we have taken the view that this is a matter of principle. I hope he accepts that that is probably the best way to proceed.

Jonathan Djanogly: I thank the Solicitor-General for his consideration of my points, although I am not entirely sure that I agree with his point of policy. When excesses are involved, insurance costs can generally be reduced, so we thought that the amendment would be attractive. However, I have heard what he has to say, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 217 ordered to stand part of the Bill.

Clause 218 ordered to stand part of the Bill.

Clause 219

Qualifying third party indemnity provision to be disclosed in directors’ report

Amendments made: No. 303, in clause 219, page 99, line 43, leave out from ‘disclosure’ to end of line 44 and insert
‘in the directors’ report of—
(a) qualifying third party indemnity provision, and
(b) qualifying pension scheme indemnity provision.
Such provision is referred to in this section as “qualifying indemnity provision”.’.
No. 304, in clause 219, page 100, line 1, leave out ‘third party’.
No. 305, in clause 219, page 100, line 9, leave out ‘third party’.—[Mr. Mike O’Brien.]

Clause 219, as amended, ordered to stand part of the Bill.

Clause 220

Copy of qualifying third party indemnity provision to be available for inspection

Amendments made: No. 306, in clause 220, page 100, line 19, leave out ‘third party’.
No. 307, in clause 220, page 100, line 27, leave out ‘third party’.
No. 308, in clause 220, page 101, line 5, leave out ‘third party’.
No. 309, in clause 220, page 101, line 6, at end insert—
‘( ) In this section “qualifying indemnity provision” means—
(a) qualifying third party indemnity provision, and
(b) qualifying pension scheme indemnity provision.’.—[Mr. Mike O'Brien.]

Clause 220, as amended, ordered to stand part of the Bill.

Clause 221 ordered to stand part of the Bill.

Clause 222

Ratification of acts of directors

Jonathan Djanogly: I beg to move amendment No. 423, in clause 222, page 101, line 34, leave out subsections (3) and (4).

Eric Illsley: With this it will be convenient to discuss amendment No. 424, in clause 222, page 101, line 35, leave out
‘nor any member connected with him’.

Jonathan Djanogly: We move on to clause 222 dealing with the changes to the law on ratification, and one of our main concerns about chapter 7 and directors’ liabilities. The clause preserves mostly the current law on ratification of acts of directors, but with one significant change. Under the Bill, any decision by a company to ratify
“conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company...must be taken by the members”
without reliance on the votes in favour by the director or any connected person.
We accept what many lawyers are saying: the changes to the law on ratification advance the existing common law position which allows the ratification of the director’s breach of duty by ordinary resolution and which does not disregard the votes of any one person interested in the ratification. The advance on the common law position will place a significant restriction on the actions of directors, make it more difficult to achieve the majority required for ratification, and might lead to an increase in the number of derivative actions taken against company directors.
For instance, what if the majority of shares in a company are held by directors, which is the norm for smaller family-type companies? In such a situation, their votes will be disregarded for ratification purposes, giving much more power to small shareholders, who will then have leverage over the owners, which will not necessarily serve the best interests of the company. What if the minority shareholder owns say only 1 per cent. of the company? Should they still have that veto over ratification?
We have tabled amendment No. 423 to delete subsection (4) and the provisions barring interested parties from voting. However, if the provision remains, would the Minister consider a threshold so that a small minority of shareholders cannot hold the majority to ransom?
Furthermore, I note that subsection (3) stops connected members voting as well. We find that provision worrying also. Surely, connected members still have rights as individual shareholders and should be treated as such, rather than as relatives. If they see it as in the interests of the company to ratify actions, why should the fact that they are a relative of a director mean that they cannot vote? We have tabled amendment No. 424 to deal with that important issue.
I wish to put on the record a letter from Stephen Hancock of Herbert Smith to the Attorney-General on 8 June 2006—it was copied to me and to Lord Sharman. It reads:
“Dear Attorney General
I should like to raise with you concerns I have with provisions contained in the Company Law Reform Bill addressing derivative actions and, in particular, with the new clause 222, dealing with ratification.
On any view the proposal to overturn the rule in Pavlides v Jensen is a major step and potentially undermines two cardinal principles of company law - that companies are run in the interests of shareholders as a whole, and majority rule. In my younger days I acted for many arbitrageurs and hedge funds. It is my view that the existence of this rule is one of the principal reasons why we do not have greenmail problem in this country. If the bill in its current form becomes law we may well start to experience the sort of secretly-settled derivative actions which have plagued other jurisdictions, especially in light of the company court's indulgent attitude to costs awards in company cases. Of course, that risk would be reduced if the court's consent were to be required for the settlement or discontinuance of any derivative action which it has permitted.
Derivative actions should benefit all shareholders and as I have said majority rule is a cardinal principle in our company law. It is important that the objective business judgement of majority shareholders, expressed by means of a ratification resolution, should be allowed to prevail to bar derivative proceedings brought alleging neglect or default on the part of directors. In this regard, it seemed to me that the provision in the earlier draft of the bill (clause 217) rendering ineligible the votes of members with a personal interest (perhaps because of an interest in the counterparty to a transaction complained of) was enough to ensure that ratification was done objectively by disinterested shareholders. However, the new clause 222, which would disregard the votes given by any shareholder connected with a director, does something different.
To begin with, I should like to make two comments on what you said when introducing the new provision. First, although the concept of connected persons will be familiar to directors in the context of disclosure of shareholder interests (usually but a minor irritation) it is quite a different matter to use it in the context of disenfranchisement. Secondly, it was unfortunate that you should seek to justify stripping such a connected person of his property (that is, his voting rights) by suggesting that he is likely to be biased or in some way under the influence of wrongdoers.
There are many companies whose shares are publicly traded and who have controlling investors. Naturally, in such cases among the directors of the publicly traded company will frequently be individuals connected with the controllers, for example a director who is also a trustee of an ultimately controlling family or charitable trust. If the new wording were to become law such controlling shareholders would be disenfranchised on a ratification vote to approve a business decision (perhaps an investment or disinvestment) which is challenged as negligent and reduced to having their views taken into account by the court when considering, in its discretion, whether to permit the derivative action. Surely bringing business judgement to bear on such questions is precisely what shareholding control should be about. Why should such a shareholder have less of a say on such a matter than an arbitrageur or hedge fund investor?
I would respectfully suggest that it would be sufficient in such a case to ensure that all shareholders whose votes in favour of ratification are to be counted have no special personal interest in the matter. This should meet the point debated between you and Colin Sharman. Clause 222 goes much further than, as you yourself put it, capturing ‘...those members who are motivated or influenced by personal advantage or gain arising from a vote in favour of ratification.’”
That very balanced, insightful letter deserves consideration. It did not arrive in time for us to table amendments to reflect Mr. Hancock’s suggestion that only those who have the advantage of a personal interest should be barred from voting rather than what is proposed in the clause, which takes an indiscriminate, blunt approach. The Minister may wish to comment on Mr. Hancock’s suggestion.
We need to get the clause right. If we do not, it could further hamper the aim of making the UK a more business friendly environment. By widening the scope for derivative actions on one hand and reducing the possibility of the directors ratifying their actions on the other, the Government will make it less likely that many talented and able people will come forward to act as company directors. We hope that the Solicitor-General will think again about the matter.

Mike O'Brien: We do not accept the hon. Gentleman’s point about increasing derivative actions; the approach in the clause is appropriate. However, I have not had the opportunity to consider the letter, which, I agree, is well argued. It would be useful if a copy could be given to my right hon. Friend the Minister for Industry and the Regions, who will give serious consideration during the summer to the points raised.

Jonathan Djanogly: I am not sure whether I said during my speech that the letter was to Lord Goldsmith, so a copy should be somewhere in his Department.

Mike O'Brien: It may well be, but I have not seen it. My noble Friend the Attorney-General would not normally be the person who considered the proposal. It would be referred to the Department of Trade and Industry to be dealt with by my right hon. Friend the Minister for Industry and the Regions. It is probably being transferred between Departments at the moment. The appropriate way to deal with it is to say that we shall consider the points raised. My right hon. Friend has indicated to me that she is prepared to do so, and I hope that on that basis the hon. Gentleman will feel able to withdraw the amendment, which we are not in a position to accept.

Jonathan Djanogly: This is an important point for us. The application of the clause with the provisions of part 11 could present problems, and more importantly the Government’s approach is blunt and indiscriminate. I was going to ask for a Division on the amendment, but the Solicitor-General has responded positively to one of our two points—the type of person who will count as an interested party. He said that a relative will not necessarily be considered someone who will take direct advantage and therefore excluded. On the basis that we will consider the matter before Report, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 222 ordered to stand part of the Bill.

Clauses 223 and 224 ordered to stand part of the Bill.

Clause 225

Protected information: restriction on use or disclosure by registrar

Jonathan Djanogly: I beg to move amendment No. 258, in clause 225, page 103, line 7, leave out paragraph (b).

Eric Illsley: With this it will be convenient to discuss amendment No. 279, in clause 225, page 103, line 8, at end insert
‘save as otherwise provided for in this Act or regulations made pursuant to this Act.’.

Jonathan Djanogly: The clause is about restrictions on the use or disclosure of protected information by the registrar. We have previously debated access to directors’ home addresses, and we acknowledge that the overall proposed framework represents a step in the right direction. As I said in earlier debates, more needs to be done, and this clause is one of the mechanical follow-up provisions.
Clause 225(2)(b) states that the registrar is not obliged
“to omit from the material that is available for public inspection anything registered before this Chapter comes into force.”
The amendments are intended either to delete that provision, through amendment No. 258, or to add the words set out in amendment No. 279. The problem is that there are concerns that, without the amendments, the registrar will not need to remove directors’ home addresses already on the register once the law changes. That view is held by many outside interested parties.

Margaret Hodge: We have had a long discussion on the protection of names and addresses on the public record. If I am honest with the hon. Gentleman, the amendments are difficult because of the practical constraints that we face. Once the information for a director is on the record, it could be embedded and appear on hundreds of documents filed over the years or decades. It would be an understatement to say that it would be difficult to remove snippets of information from old paper records and microfiche, and it is important to keep information for enforcement agencies.
Clause 741 contains the power to provide for historic records of addresses to be made unavailable for public inspection. We have discussed that clause, as the hon. Gentleman knows. We accept that there may be exceptional circumstances in which it is appropriate for an address to be taken off the public record. However, each case needs to be considered individually, taking account of practical consideration, the director’s need for privacy and the implications of the loss of information. We do not expect there to be more than 10 or 20 such cases. We will consult on the regulations, but we do not think that the hon. Gentleman’s suggestion is desirable or practical.
I fully agree that, if a provision in the Bill or regulations under it required the Registrar of Companies to omit protected information from the material available for public inspection, the clause should not relieve her of that obligation. Amendment No. 279 is not necessary. Clause 741(1) provides:
“regulations requiring the registrar, on application, to make an address on the register unavailable for public inspection.”
We do not consider that clause 225(2), when read in the context of the other provisions of the clause, casts doubt on that. I therefore hope that the hon. Gentleman will withdraw his amendment.

Jonathan Djanogly: For us, this involves a point of principle. We made that point earlier. On that basis, I ask for a Division on amendment No. 258.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 10.

Question accordingly negatived.

Clause 225 ordered to stand part of the Bill.

Clauses 226 to 238 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clauses 239 to 242 ordered to stand part of the Bill.

Clause 243

Whether permission to be given

Jonathan Djanogly: I beg to move amendment No. 485, in clause 243, page 110, line 22, leave out paragraph (b).

Eric Illsley: With this it will be convenient to discuss the following amendments: No. 494, in clause 243, page 110, line 26, leave out ‘or proposed’.
No. 487, in clause 243, page 110, line 29, leave out
‘or another person (or both)’.
No. 488, in clause 243, page 110, line 30, leave out subsection (4).
No. 495, in clause 243, page 110, line 38, at end add—
‘(6) A derivative claim under this Chapter may only be brought if the directors have been requested by a member of the company to bring a claim in respect of an act or omission specified in subsection (3) and have not agreed to the request after the expiry of a reasonable period from service of the request.’.

Jonathan Djanogly: We move on to part 11, another significant new area of the Bill, which is complex and has brought much interest and no little concern from the City among others. I should especially like to thank Farrar and Co solicitors for the advice they have given us on the analysis of this part. Let me set the scene. It applies equally to all clauses in this part, but I shall not repeat it.
A shareholder can only bring a claim on behalf of a company in limited circumstances. Part 11 sets out a new procedure of derivative actions that enables shareholders to bring a claim on behalf of the company for breach of duty if that breach has not been authorised or ratified by the company. Together with part 10, we believe that that has significant potential to increase the liability of directors. Before I go any further, I should like to explain the current common law position and set out what the Government aim to do.
Derivative claims are proceedings brought by a shareholder. Under the Bill, they must be in respect of a course of action vested in the company, for the purposes of seeking relief on behalf of the company, and brought only in respect of courses of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
To bring a derivative claim, a shareholder must commence proceedings in the usual way and then apply to the court for permission to continue the claim. In determining whether to grant permission, the court is required to take into account the series of factors set out. There are two major concerns. The first is that it advances the common law in undesirable ways. The second is that the effect of the clause, particularly when combined with part 10, will be detrimental to directors generally. We have tabled amendments to address those concerns, but the leading common law case on which codification attempts to build and on which the hon. Member for Cambridge (David Howarth) is clearly dying to speak, is that of Foss v. Harbottle. If the Bill’s intention is to enshrine in statute the well established exception to the rules set out in that case, our view and that of the lawyers who have advised us is that this is not immediately achieved by the current drafting.
The rule in Foss v. Harbottle is that a member cannot bring in an action on behalf of the company for an injury done to the company; the company is the injured party and the action vests in it. The exceptions to the rule in Foss v. Harbottle are, broadly speaking: an infringement of personal rights of members; ultra vires or illegal transactions on the basis that the majority cannot ratify such transactions; transactions requiring the sanction of a special majority; and, importantly, the fraud and control test whereby the transaction constitutes a fraud on the minority. This includes fraud proper as well as breach of fiduciary duty as a director and when the wrongdoers are in control of the shares of the company.
The non-inclusion of the fraud and control test in the Bill represents a radical departure from the previous thresholds to a member making a derivative claim. The result of that non-inclusion is that it will be easier for shareholders to bring claims against directors. Furthermore, it is the view of many law firms that the current form of part 11 does not address concerns about the court having an unlimited discretion in deciding whether to allow derivative actions to proceed. The non-inclusion of the fraud and control test represents a fairly radical departure from the previous thresholds to a member making a derivative claim.
The court will still be required to consider the evidence and merits at the earliest stage, and there is a danger that that part of the Companies Bill will simply create a more complex procedure without any corresponding reduction in the potential administrative burdens for companies. It therefore makes sense to amend part 11 to preserve the traditional thresholds of fraud on the minority and wrongdoer control, as that would make it clear in statute that the new regime is not intended to sweep away the existing case law.
As the new legislation does not replicate existing case law, it will take some time for a body of case law to develop. Although of persuasive nature, the previous rules in Foss v. Harbottle and other case law will not be directly relevant in determining whether the provisions of the legislation have been applied. That will create uncertainty for some period as to the extent of the derivative claim provisions, and the burden of that will largely fall on the company. That could, in part, be remedied by the Bill more closely mirroring existing law.
In practice, derivative claims have been relatively rare to date. It has been pointed out to us that the Government will achieve relatively little by enshrining this rare bit of case law into statute. Granted, they will have codified a part of the common law, but any potential benefit that that will have—it will be minimal—will be far outweighed by the possible damage that will be wrought by increased shareholder litigation and by reducing the number of people who are willing to take up company directorships in the UK.
A further key change in the Bill is that the persons engaging in fraudulent conduct need not have received a benefit. Members will therefore be allowed to make claims for an honest act or omission of a director if it results in a breach of duty, regardless of whether they received a benefit. Under Foss v. Harbottle, it is not permissible to make a derivative claim as a result of negligent action unless the person in breach of duty receives a corresponding benefit. The Bill represents a shift from the existing position, in that the focus is much more on allowing member control of directors’ actions.
The range of circumstances under which a derivative action may be brought will be much wider than is currently the case. A shareholder who brings proceedings must apply to the court for permission to continue the claim. If the court judges that a person seeking to promote the success of the company for the benefit of the shareholders would not continue the claim, permission must be refused. Permission must also be refused if the conduct complained of has been authorised or ratified by the company—that is, by the shareholders.

Eric Illsley: Order. The Committee is suspended for one minute. We are inquorate; there is not a sufficient number of Members in the room.

Sitting suspended.

On resuming—

Mike O'Brien: On a point of order, Mr. Illsley. The speech by the hon. Member for Huntingdon has cleared his own Back Benches. It has cleared all but one Liberal Democrat and many Labour people from the room, and even encouraged some to get out their newspaper. He may feel slightly aggrieved, but I assure him that it is a fascinating speech. I was listening to him with great care, as I am sure you were, Mr. Illsley, although I saw your head start to droop slightly.

Eric Illsley: I call Mr. Djanogly to respond.

Jonathan Djanogly: I am delighted by that reassuring point of order from the Solicitor-General. I shall do my best to keep up the heightened tension.
As we debated earlier, there will also be a significant tightening in the law in relation to the ratification procedure which will make it more difficult for a director’s act to be ratified. On any resolution to ratify a director’s negligence, default, breach of trust or breach of duty, the votes of shareholders who are personally interested in the ratification must be disregarded. The consequence of that is that ratification will be more difficult to achieve and that there are therefore likely to be more derivative actions. The consequences of the prospect of more derivative actions for company directors is grave, especially when the prospect is made more likely by the extension of possible liabilities that face directors under part 10. This is once again an area of law about which the Government have said that the intention is to codify the existing common law position. Unfortunately, once again they are overturning the common law position.
Parts 10 and 11 in effect create what my noble Friend Lord Hodgson referred to as a “double whammy”—an exciting term for the House of Lords—for company directors. The codification of both the basis on which to bring a claim and the means by which that claim is brought will serve only to make it easier for claims to be brought against company directors. There is a real concern that that will act as a disincentive to people who might want to become directors in the future, which can only be detrimental to UK plc.
The concern about the interplay between parts 10 and 11 and the effect that that will have was well set out by Neil Fagan, a partner in the law firm Lovells, in his article in Insurance Day on 16 December last year. After discussing the part 10 duties in some details, he went on to say:
“Significantly, there is now a provision for derivative claims to be brought. A derivative claim may be brought in respect of a cause of action arising from an act or proposed act or omission involving negligence, default, a breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both). Thus the rule in Foss v Harbottle, that shareholders cannot sue directors (subject to certain exemptions), is presumably to die after approximately 150 years.
A member of a company who brings a derivative claim must apply to court for permission to continue it. Among other factors the court must consider whether the member is acting in good faith in seeking to continue the claim.
There are other provisions in relation to derivative claims but this is clearly a significant change in the law. One can only hope that the provision that the member should act in good faith is sufficient to stop spurious or speculative claims.”
The fear that increased litigation might lead to increased insurance costs is also real for company directors. My hon. Friend the Member for Hornchurch (James Brokenshire) mentioned that when we discussed part 10. Should the rates that directors and officers have to pay go up, there will be a further disincentive to people becoming company directors in the UK. That is becoming a consistent theme of parts 10 and 11, and it is not a happy one.
To illustrate the potential problem, I shall read from an article in Insurance Times from November of last year, which states:
“Proposed company law reforms could lead to a rise in directors’ and officers’ (D&O) premiums, Heath Lambert has predicted.
The Company Law Reform Bill attempts to clarify directors’ duty of care.
Mark Hardinge, Heath Lambert’s chief executive of financial and professional risks, said it was inevitable that insurers would seek to increase rates as the Bill could increase the scope of negligence claims against executive management.”
Now that there is a statutory basis for a derivative action, it will be easier for shareholders to sue directors or others for a broader range of conduct than would be possible under the common law.
The implication of that extended right to sue has been well set out by city solicitors Norton Rose in their briefing note of December 2005, which states:
“In extending the conduct in respect of which shareholders can complain, there is a concern that the new provisions may be abused by disgruntled or activist shareholders. In addition to the possibility of claims for negligence, the ability to claim for breach of duty would allow a shareholder to bring a claim (although the court might not allow it to continue) for breach of any of the new general statutory duties...as well as regulatory obligations, such as environmental or health and safety obligations, of which there are many. Shareholders in quoted companies could bring claims for matters such as breaches of the Listing Rules or the Disclosure Rules. The new statutory right provides another tool for use by activist shareholders to push for change at underperforming companies. How useful this will be will depend on the court’s willingness to exercise its discretion to intervene in what, in many cases, will be simply commercial decision-making by the company, its directors and majority shareholders. In any event, boards should review the wording of their D&O insurance policies to ensure that defending derivative claims is covered.”
The Government claim that the new statutory derivative procedure is aimed at making the law
“clearer and more accessible, but will not result in a major change in the law.”
That statement was made by the then Minister, the right hon. Member for Cardiff, South and Penarth (Alun Michael), in a letter to the Financial Times on 9 November 2005.
It is now clear from our analysis and the comments that we have received from a significant number of stakeholders in this area that the then Minister was wrong to claim this. In fact, the proposed statutory claim is wider, but there are a number of other significant changes that I would like the Government to comment on. The question of cost has been raised by the solicitors Farrer and Co. In May 2006, it wrote:
“The legislation does not specifically deal with the question of costs. In the event that a member is granted the right to take a derivative action (whether or not successful), the assumption is that the court would require the company to pay the costs of the action. Does this extend to the costs of the defendant if the derivative claim is not successful? Will the company be required to bankroll an action which may last for some years with significant costs in circumstances where the duly elected board has no control? This could be clarified.
The costs of a derivative action will ultimately be borne by the company in circumstances where it is obliged to take action to defend a claim or simply to make representations. In particular, given the lack of information that a member may have, this may lead to an unduly bureaucratic and costly process (both in terms of cash and management time) for companies.”
The concern that part 11 will increase the potential liabilities for directors and the chance of tactical and vexatious litigation by activist shareholders is well expressed in this June 2006 briefing from the law firm Allen and Overy:
“We are concerned that Part 11 empowers shareholders to commence litigation against the directors without consulting or informing the board. This firstly increases the chances of tactical litigation, secondly creates the capacity for disruption and thirdly gives the shareholder a primary (rather than a derived) right to bring a claim in the company's name. To elaborate on the third point, it is a fundamental principle of company law that directors owe their duties to the company and that therefore the company has the primary right to sue them in respect of wrongdoing. At present a shareholder derives a right to sue in the company’s name in particular circumstances, including because the wrongdoers who control the company will not exercise the company’s primary right to sue. By failing to include a requirement that the board be consulted or informed about a shareholder’s intention to sue the directors in the company’s name, the company will be deprived of an opportunity to exercise its primary right to sue in any circumstance where the shareholder chooses not to consult the board.”
In summing up how dangerous this part of the Bill may be for company directors, I would like to quote from an article by Robert Watts in The Daily Telegraph on 29 January 2006.

Louise Ellman: The hon. Gentleman has been speaking for nearly 15 minutes on this issue, which is clearly important to him, but I note that he does not have a single supporter here. Is he really intent on scrutiny, or is this some kind of monologue, which none of his own side is interested in?

Jonathan Djanogly: No, my own side are very interested in this, but they know what I am going to say. The hon. Lady does not, so I thought that I would give her the full benefit of my considerations. This is a matter of great importance to companies and company directors, and I trust that she will bear with me.
The article states:
“Meanwhile, there are even greater concerns about the part that relates to derivative claims. These are court actions that, the bill says, may be brought by shareholders against the directors in relation to ‘an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.’
In fact, the bill goes on to say that the action can be brought against a ‘director or another person (or both)’. Former directors, consultants and even lowly employees who own stock could also face these actions, it states.
It will be relatively easy for a shareholder to launch a claim, but any such action would need a court’s permission to continue. 
Such actions could be costly, distressing and last for years. Equitable Life, for instance, pursued 15 former directors, initially claiming damages of £1.7bn, in an action that lasted for more than four years before the two sides settled.
Lawyers are divided on whether such actions could become commonplace. It would all depend on how the courts interpreted what almost all parties agree is badly drafted legislation.”
Many company lawyers are concerned that the Bill might spawn an industry of “ambulance-chasing” legal firms similar to those that have fed off personal injury claims. Richard Ufland, a corporate finance partner at Lovells, said:
“Law firms will be able to take on ‘no-win no-fee’ claims in this area... This is an important consideration for the Government in deciding whether to extend these actions. There is also the concern that activist shareholders may grab at any chance to use court actions as a means of trying to force through changes they want.”
Our amendments would rectify the problems that I have highlighted. Amendment No. 485 was originally tabled in the Lords and would remove subsection (2)(b). This is what Lord Hodgson argued in Grand Committee in the Lords:
“This first amendment would remove subsection (2)(b). Section 459 of the Companies Act 1985 provides a separate cause of action to shareholders where their company’s affairs have been conducted in an ‘unfairly prejudicial’ manner. Section 461”
of that Act
“then gives the court wide powers to grant relief in respect of the matter complained of. There is, therefore, no place or need for a derivative claim as provided in Clause 243(2)(b) of the Bill—the court has all the appropriate jurisdiction under Section 461.
It has been argued to us that the existence of Section 459 is another reason why the codification of derivative claims need not take place: there is already a working method whereby aggrieved shareholders can exercise their rights. If this codification goes ahead, the Bill should not muddy the waters with such a reference to Section 459, which is a stand-alone procedure unrelated to derivative claims.”—[Official Report, House of Lords 27 February 2006; Vol. 679, c. GC 3.]

David Howarth: I have some sympathy with at least one of the hon. Gentleman’s amendments, but amendment No. 485 is puzzling. As I read it, clause 243(1)(b) restricts the scope of derivative claims by putting in an additional requirement that such a claim can be proceeded with only when the claimant seeks relief on behalf of the company. I may have misread it, but it seems to me that the amendment implies that derivative claims could be brought on personal rights. That would be a broader right than that in the Bill.

Jonathan Djanogly: No. I think the hon. Gentleman has misconstrued our amendment, which basically says that the clause is confusing the derivative process with the section 459 process and that they should be kept separate.

David Howarth: It seems to me that the opposite is the case and that the purpose of clause 243(1)(b) is precisely to separate personal rights, which come under section 456, or whatever it will be when the legislation is consolidated, and bringing true derivative claims on behalf of the company. If clause 243(1)(b) were removed, the confusion that the hon. Gentleman seeks to avoid would be more likely to exist.

Jonathan Djanogly: The hon. Gentleman has his view and I am not sure that I agree with it, but it is certainly worth thinking about further.
Clause 243(3) states:
“A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”
Our view is that the wording of that subsection is not sufficiently precise and is too wide. In particular, the use of the words “or proposed” go too far. A member should not have a statutory right to make a derivative claim to restrain some proposed act or omission. The intention should be to provide a remedy for a member when there has been an actual act or omission. To include the words “or proposed” may be a charter for members to take action at any time to restrain what they think is a potential future breach of the relevant duties. We propose to amend the clause as set out in amendment No. 494.
The Institute of Chartered Accountants in England and Wales raised some concerns in its April 2006 briefing, which form the basis of several amendments. Amendments Nos. 487 and 488 are ICAEW amendments and I want to read from the institute’s briefing of 27 April, which sets out its concerns and which we support:
“We are concerned that the draft clauses in the Bill do not reflect the DTI’s intention as stated in its explanatory material and agreed during the Committee stage debate, codifying existing common law principles on derivative actions. They create new rights for members to bring a derivative action against persons other than directors and against directors in cases of negligence, default, breach of duty or breach of trust, as well as fraud. An actual or alleged breach of duty by a director (for example, in preparing incorrect accounts) could effectively be used as a ‘springboard’ for the member to bring a derivative action against others (for example, an auditor). We believe this will encourage nuisance claims against directors in order to open up a route to others.”
The purpose of amendment No. 487, therefore, is to tie the clause down to directors. However, I would be interested to hear from the Solicitor-General who he thinks could be caught by the last line of subsection (3).
The briefing paper continues:
“In addition, allowing an action in respect of a cause which arose before the person seeking to bring the derivative claim became a member of the company, could attract people to become members purely to make a claim, after the event.”
That is why amendment No. 488 would delete subsection (4).
Amendment No. 495 was suggested by the City law firm Allen and Overy to ensure that the company retains an opportunity to exercise its primary right to sue the directors. Although it is easy to get carried away with arguments for and against members being able to seek relief on behalf of the company, we should not forget—

Stephen McCabe: On a point of order, Mr. Illsley. Is there anything you can do to ensure that we concentrate on scrutinising the Bill rather than having to listen to a repetitious, time-wasting monologue from the only Tory in the room?

Eric Illsley: That is not a point of order for the Chair and the hon. Member who is speaking is completely in order.

Jonathan Djanogly: Thank you, Mr. Illsley. I am doing my best to put across a comprehensive explanation of our amendments.

Mike O'Brien: I think the hon. Gentleman is doing his best. This is an important part of the Bill and unfortunately he is the only Conservative Member present. It is a sad reflection on his colleagues that on a serious matter such as this they have allowed him to read out—at great length, in what appears to be merely a time-wasting exercise—a series of rather repetitious notes from various solicitors’ firms.
However, the hon. Gentleman has made some important points, which I shall be happy to deal with in due course. However, the Committee has been treated with some contempt by the Conservatives, who have simply cleared the room and gone away. They appear not to be concerned about what the hon. Gentleman claims is an important issue.

Jonathan Djanogly: The Solicitor-General has jumped in and made his political point. I have not been repetitious and I have brought up some matters that are very important to many stakeholders.
We should not forget that the primary right is that it is for the company itself to initiate the action. Amendment No. 495 would embed that right in primary legislation by reiterating that the company should be given a reasonable period in which to decide to take action before a derivative claim is stated.

David Howarth: The hon. Gentleman thought that I was dying to intervene to explain the law on Foss v. Harbottle. When I lectured on the subject, it took several weeks to explain the law on that case. I am far from dying to intervene at such great length.

Jonathan Djanogly: The hon. Gentleman makes my point: he said he spent weeks talking about the case. I spoke for a mere 20 minutes on Foss v. Harbottle, yet the Government Whip complains that I took up too much time.

David Howarth: My point, which is rather different, is that because the law is so complex it is perfectly reasonable for the company law review and the Government to attempt to put it in statutory form. However, there is a problem with that exercise, which leads to some of the queries that have been raised. The statute does not say what the purpose is of the rule in Foss v. Harbottle, and, because it lacks that statement of purpose, questions about the scope of the statute come into play.
It has to be remembered that the purpose of the rule in Foss v. Harbottle is to prevent legal actions that waste everyone’s time and effort. Legal actions being brought by shareholders on behalf of a company for claims that are the company’s claims, which claims are doomed to failure if the company takes action or is capable of taking action, would make those breaches of duty moot—because, for example, they had been ratified.
The key point that is missing from the Bill, because it is legislation rather than a set of common law cases, is that basic statement of purpose. It is the job of the Solicitor-General and the Minister to say what the purpose is. If the Government were to reaffirm that the purpose of the statutory provisions is to maintain the existing law—that the purpose of the exercise is to prevent legal actions that are a waste of time—many of our fears would be reduced.
We have other uncertainties about Foss v. Harbottle—for instance, whether the rule is about procedure or whether substantive elements are hidden within it. That is why it took so long to explain. The procedure elements and the substantive elements—for instance, about directors’ duties—tend to get confused in case law, which is why it is a good idea for the Bill to separate the two.
The Solicitor-General should state that, in the Bill, the view being taken of derivative action is purely procedural and that the underlying substantive rights are dealt with elsewhere. For example, when the hon. Member for Huntingdon raised the benefit point, it was about the underlying substantive legal actions rather than the procedure for derivative action, which is what these clauses are about. That is precisely the kind of confusion in case law that the Bill is trying to sort out.

Mike O'Brien: I assure the hon. Gentleman that we are reaffirming the purpose behind the rule in Foss v. Harbottle, and that we do not in any way seek to repeal it. The courts will still be referring to it.

David Howarth: I thank the Solicitor-General. That statement will help us in interpreting the provisions.

Jonathan Djanogly: Does the hon. Gentleman not think that the omission of the fraud control exclusions will in practice change the law?

David Howarth: That is an interesting point. We shall come to it in a later clause, and I may remark on it then.
There have always been problems in defining fraud on the minority. Indeed, a leading academic thinks that it should never have been called fraud on the minority, but that it should be fraud on the company. One explanation of why that is not being sorted out in the Bill is because it is not that easy to define fraud on the minority.

Jonathan Djanogly: If we are going to codify and move away from the common law, should not the issue that the hon. Gentleman says is difficult be addressed?

David Howarth: That is a good point, and I would be interested to hear the Solicitor-General’s comments on it. That brings me back to the question with which I started—whether the fraud is part of the substantive law or part of procedural law.
Amendment No. 495 is helpful. It provides that a claim could be brought only after the claimant had approached the board. That brings me back to Foss v. Harbottle. It is about trying to prevent legal action from being brought by shareholders if action is being taken by the appropriate organ of the company. As I said when discussing directors’ duties, in most cases that organ will initially be the board of directors.
To stop mischief of the sort that Foss v. Harbottle is designed to prevent, the amendment would require people who wish to bring derivative claims to approach the board of directors first, and only if the board turned down the request to bring an action in the company’s name should there be any question of derivative action being taken by the shareholders.
I have explained why I do not think that amendment No. 485, which would leave out paragraph (b), is helpful. It would tend to create precisely the confusion that it seeks to prevent over the difference between a personal action by a shareholder and an action brought on behalf of a company. That brings us back to one reason for it taking so long to explain the law in Foss v. Harbottle to those trying to learn it—it is not entirely clear what the exceptions to the rule in that case are. Three of the four are not really exceptions, but simply examples of the rule not applying in the first place. The only real exception is the fourth, so-called fraud on the minority.
I am not sure that amendment No. 494, which would leave out the words “or proposed”, is helpful. There are circumstances in which it would save everyone’s time and effort for disputes to be sorted out before damage occurred. It might be helpful if there were at least discussions on action early, particularly if the damage might not be able to be remedied later. The amendment is not helpful, but I understand the point.
Amendment No. 487 is a probing amendment to find out who the other person referred to might be. I suppose that the obvious suggestion is that it would be the company secretary, who is an officer of the company.

Jonathan Djanogly: I will also be interested to hear what the Solicitor-General has to say. The definition of “another person” could go much further than auditors, a law firm or employees who own a few share options.

David Howarth: The question is whether a company will have a claim against such people. We return to the central idea of shareholders trying to sue in the company’s name. The underlying claim must be a claim of the company, not of another person. That is why the question arises who the other person might be.
Amendment No. 488 would leave out subsection (4), which allows late-coming shareholders to make a claim. The problem, to which leaving out the subsection is not the answer, is the amount of information about the situation of the company that might be available to a late-coming shareholder. If we believed in perfect information and perfect markets, we would say that in buying shares, a late-coming shareholder takes on the risk for which the market has discounted the price, and we could therefore reasonably say that a late-coming shareholder should not be allowed any such claim. The market transaction would already have taken account of the risk.

Jonathan Djanogly: Is there not also a problem in establishing loss in such a situation?

David Howarth: No, because the loss is the company’s loss, not that of the individual shareholder. We keep returning to that point.
The point to consider is whether a late-coming shareholder takes on any underlying risk of loss to the company, as the company’s value will already be less having been discounted by the market. The counterpoint to that, on which I will be interested to hear the Solicitor-General’s comments, is the extent to which the clause is aimed at companies whose shares are not freely traded and whose value might therefore not represent all the information that might have been available. Trades occur in circumstances in which information does not fully discount the price of shares, which might cause difficulties.

Jonathan Djanogly: Does the hon. Gentleman agree that the provision will encourage vexatious activists to take small stakes and arrive, as Johnny-come-latelies, on the back of something that happens?

David Howarth: I suppose there is a risk of people doing that—for example, those who object to the idea of corporate social responsibility. There are investors of that sort who might want to challenge, for instance, directors’ decisions to follow environmental policies. The question, however, is whether the safeguards in the rest of the Bill will discourage such people. It seems unlikely that such a person will be able to meet the requirements in the other clauses, particularly those relating to the initial hearing.

Jonathan Djanogly: Is it not the point that well-funded activists will not be dissuaded by the cost position, because they will not meet the costs in any event? They will be making a political point.

David Howarth: There is an issue about how much people are prepared to pay to make such political points—it might become very expensive, not only for the individual claimant, but for that person’s solicitor, assuming that the rule continues after the Bill comes into force.
There is the problem of the solicitor’s personal liability for bringing derivative claims or claims under the exceptions in Foss v. Harbottle when they should not have done so, because they have, in effect, claimed to be the company when they are not. In a way, however, the deterrence and the value of claims are matters for the cost rules as much as for the procedural rules.
The underlying point on subsection (4) concerns the belief in the efficiency of markets, particularly share markets. The question is whether that is different, depending on whether we are looking at companies that are publicly quoted on the stock market or companies that are not, and whether further thought might be given to the application of the rule.

Mike O'Brien: I find myself in broad agreement with quite a lot of what the hon. Gentleman has said, and he has also dealt with some points raised by the hon. Member for Huntingdon. The provisions will not produce a substantial increase in derivative claims—as he said himself, such claims are rare, and we expect them to remain relatively rare. The introduction of the provisions will not be a significant deterrent to people becoming directors.

Jonathan Djanogly: One solicitor told me that anyone who called a solicitor now to ask how to make a derivative claim would be told, “This is all common law. It’s very complicated. It’s not down in statute.” He told me that putting the procedure in statute will make it more straightforward, so more people will take it up.

Mike O'Brien: In other words, the hon. Gentleman’s view is that the more confusion there is, the better, but I do not accept that that is the appropriate approach. The Government’s view is that we should set things out in statute; indeed, the Conservative party said that it wanted certain provisions on company law put in statute. We have included the derivative actions provisions, and I appreciate that the Conservatives might not like that, but this area of law is important and people should know what it is all about.
I want to deal with a couple of the points raised by the hon. Gentleman and with some of his amendments. He quoted from the Insurance Times and Insurance Day, but I should point out that those quotes are from before the Government tabled amendments on Report in the Lords to address some concerns that he mentioned.
The hon. Gentleman also suggested that the rule in Foss v. Harbottle would die after 150 years, but that is not the case. The principle that only the company can sue remains. We are discussing the exceptions to the rule, which have developed over 150 years, and in a rather confused way, as the hon. Member for Cambridge said. That is rather unhelpful because there are exceptions that are not really exceptions, and the situation has become somewhat confusing. That is why the Law Commission thought that there should be a new provision. However, the basic rule remains and it is the cornerstone of this area of law. Our overall aim is implementation of the recommendation of the Law Commission that the right to bring a derivative action in common law should be replaced by a new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue an action.
We agree with the Law Commission that it is important that procedural requirements for bringing a derivative claim are accessible and clearly set out so that they can be understood by shareholders and directors. It is important to emphasise that this part of the Bill does not introduce a wholly new mechanism. The derivative claim is a well established procedure by which shareholders can, in certain circumstances, bring an action in the name of the company. It is in effect a failsafe mechanism rather than a weapon of first resort. It is important to remember that although members who bring an action can be required to bear heavy legal costs, damages are paid to the company rather than to the individual shareholders. So inherent in the whole procedure is a deterrent against bringing frivolous actions.
There will also continue to be very tight judicial control of cases brought under the new procedure. A derivative action is not the same thing as a shareholder or class action in the American courts, which is brought in the name of a group of shareholders. Under the reforms of directors’ liabilities introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004, companies may already indemnify directors against any liability incurred in respect of such actions, even if the judgment is given against the director. The new statutory procedure differs from the common law in two key respects.
First, we do not want the claimant to have to show wrongdoer control—that the directors whom the claimant believes have acted in breach of their duties to the company are in control of the company—as this may make it impossible for a derivative claim to be brought successfully by a member of a widely held company, including almost all major quoted companies. We also want it to be possible to bring a claim in cases of negligence, even if it cannot be shown that the directors have profited from the negligence. In doing so we want to achieve a proper balance between the ability of directors to take business decisions in good faith and the right of minority shareholders so that shareholders can bring meritorious claims on behalf of the company.
It is clearly important that we protect directors from vexatious and frivolous claims, but we must also protect the right of shareholders. [Interruption.] May I just point out that I am absolutely delighted that, as I have risen to speak, the Conservatives have trooped in. The Conservative Front-Bench spokesman, the hon. Member for Huntingdon, cleared the room. I stood up to speak and Members rush back in. I take that as a compliment.
We do not accept that putting the derivative action on a statutory footing will lead to more claims against directors. It is important that there is greater clarity about how a shareholder may bring a derivative action. It is unlikely that the proposal will result in a significant increase in the number of actions. However, we have made it clear from the beginning that we want claims to be dismissed by the courts at the earliest possible opportunity and without involving companies. The reforms introduced to civil procedure by Lord Woolf, however, mean that certain unmeritorious cases may get further before being thrown out. We have therefore tabled a number of reforms to those procedures to ensure that unmeritorious claims can be dismissed at an early stage.
I am in broad agreement with the hon. Member for Cambridge on his analysis of amendment No. 485 and I will not burden the Committee by repeating it. Amendment No. 494 is based on a misunderstanding of the current law and of the position under the statutory statement of directors’ general duties. Clause 164 provides that the consequences of breach or threatened breach of the statutory duties are the same as would apply if the corresponding common law rule or equitable rule applied. The reference to threatened breaches is important.
Under the present law companies may be able to take pre-emptive action to drop a breach of duty from taking place before it happens and the damage is done. There could, for example, be a threatened breach of duty if a director is refused permission to exploit a corporate opportunity but announces that he is going to go ahead anyway. The remedies in such cases, which include an injunction or declaration, provide an important safeguard of the company’s interest against wrongdoing by a director. A derivative action is an action brought by the company, as the hon. Member for Huntingdon repeatedly said, and there is no sensible basis on which the remedies available to the court should be limited in the way proposed in the case of a derivative claim.
On amendment No. 487, we followed a clear Law Commission recommendation in drafting the clause. It may be helpful if I set out a couple of examples cited by the commission. In the first, relief is sought from a third party for knowing receipt of money or property transferred in breach of trust. It seems correct that the member should be entitled to pursue a remedy against a third party that is holding assets belonging to the company that it has obtained in such circumstances.
In the second example, a profitable company is a victim of a tort by a third party. The directors, although otherwise committed to the well-being of the company, have ulterior motives for not wishing to enforce the remedy for the tort. Although the directors would in such circumstances be in breach of duty, the breach would not give rise to a claim. Therefore, it would not be open to a member to bring derivative proceedings against the third party. Again, we believe that that is the right outcome.
I hope that those examples help to show that it is possible to uphold important principles while placing reasonable constraints on the application of the provision, and that it will not result in members seeking to bring derivative claims against third parties simply because they disagree with a board.

Jonathan Djanogly: Does the Solicitor-General consider that the provision will likely be expanded to cover auditors and, indeed, employees other than directors?

Mike O'Brien: I shall consider that, but as far as we are concerned, it is not open to people to bring derivative actions merely because of a disagreement. There must be a clear view that something is damaging, not to individuals but to the company itself. On that basis, I hope that the hon. Gentleman is able to withdraw the amendment.

Jonathan Djanogly: What about amendment No. 495?

Mike O'Brien: The hon. Gentleman is quite right. I have not dealt with amendment No. 495 or, for that matter, amendment No. 488.
On amendment No. 488, clause 243(4) responds to the request from some respondents to the company law reform White Paper, including the Law Society, that part 11 should state clearly that it is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company. That reflects the position in the common law on derivative action.
On amendment No. 495, at present a derivative claim is not available to the minority shareholder unless he can show, to put it briefly, that the wrongdoers are in control. The Law Commission observed that the meaning of “wrongdoer control” is not clear, and as long ago as 1962 the Jenkins committee said that it would be extremely difficult to devise a satisfactory general provision expressing the concept and the remainder of the exception to the rule in Foss v. Harbottle in wider terms. That is why the Law Commission proposed a new statutory remedy and why the clause is drafted as it is. I hope on that basis that the hon. Gentleman will withdraw the amendment.

Jonathan Djanogly: The Solicitor-General spoke rapidly towards the end of his comments on the latter amendments. I found it difficult to understand what he was saying, so it will be very much a matter of reading Hansard and perhaps returning to some issues on Report.
The Solicitor-General suggested that I would sow confusion by removing certain words from the Bill. That is not what I intended at all. I am simply recognising the widely held view that the Bill will increase the amount of litigation and that there will be consequences arising out of that such as, for example, high insurance costs. He did not face up to that, answer the question or analyse whether that is likely. He may not have any research on the subject, but it would have been helpful to have had some, as we have heard from many people that it is of great concern.
On amendment No. 494, the Solicitor-General said that the reference to “proposed act” reflects the common law position.

It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One o’clock.